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Have you ever had an emergency pop up? Have you ever found yourself scrambling trying to find the money to cover it? Then you, my friend, need to start your Emergency Fund savings, or as I like to call it, my oh-$#*! fund.
In this article we’re going to talk about what an emergency fund is, what an emergency fund should be used for, and where do you put an emergency fund?
Why is an Emergency Fund Important to Have?
Money, in general, is a huge point of stress for many people. The purpose of an emergency fund is to give yourself a buffer from those oh-$#*! moments, like losing your job, an unexpected death in the family– things that tend to be big ticket items that you wouldn’t necessarily have alot of warning about.
If you are a budgeting beginner or someone who has been budgeting for years, you need to start setting aside money for potential emergencies now!
HOW MUCH MONEY SHOULD YOU HAVE IN AN EMERGENCY FUND?
How much money should you have in your emergency fund is an important question to consider.
If you’ve been poking around in finance even a little bit, you know there are a few different philosophies on how much is enough.
One of the most prevalent pieces of advice is having 3-6 months of savings put away. I know that’s a ton of money. We’ll dig into how to save it later, but for now, let’s stick to how much.
First, the difference between 3 months of salary and 6 months of salary is huge. A few different factors should be considered when deciding what’s right for you.
First, how steady is your job? What’s the likelihood you could be fired?
My brother is in the military and with that comes quite a bit of job security. He wouldn’t go to work one day and come home with 2-weeks notice, that’s just not how the military works. So 3 months would probably be sufficient for the kinds of potential expenses that could crop up for him.
Second, who is depending on you?
If it’s just you, maybe you have a little more wiggle room to make drastic cuts should they become necessary. Or perhaps you could move in with a friend or get a roommate should you suddenly find yourself out of work.
If you have a number of dependents, that’s quite a different situation. It’s been said that for every $10,000 you make in salary it will take you about a month to find another job. Go ahead and do the math on that one. Yeah, it could be awhile for you to find replacement work.
So in that scenario, you and your 3 kids would probably need the bigger cushion of 6 months put aside.
Third, what is your crisis budget?
If you don’t know what a crisis budget it, it’s just what it sounds like. If you find yourself in a crisis, what is your bare-bones budget? We’re talking going out of business, everything must go kinda budget.
You need to know this number!
Your crisis budget bottom line is the amount of money that you absolutely have to have to keep going. Rent, food, your fixed bills.
Once you’ve figured that out and where you fall between the 3 and 6-month saving mark, you’ll know how much money you need.
Are you trying to payoff debt?
Dave Ramsey is famous for his Baby Steps to Financial Freedom. One of his steps is to save $1000 as a starter emergency fund. (We’ll talk more about this below.)
You should decide for yourself what your financial priorities are and subsequently whether you want to have a starter Emergency Fund to put more money into debt payoff. Or if you want to push forward into a full fledged Emergency Fund.
EMERGENCY FUND EXAMPLES| WHAT SHOULD YOUR EMERGENCY FUND BE USED FOR?
Let’s talk about what your emergency fund should be used for.
LOSING YOUR JOB
For most people, losing your job isn’t something you know about months in advance.
And even if you did know months in advance are you prepared to cover your monthly bills with the money you have on hand currently?
Hurricanes, tornados, wildfires, floods.
As someone who has lived through a couple of those, in most cases you don’t have necessarily have a ton of advanced notice. Nor is there much that can be done.
Do you know for most people flood insurance isn’t something included in standard home owners insurance or covered by renters insurance?
Point is natural disasters happen. How prepared are you?
GOVERNMENT SHUTDOWN (GOVERNMENT EMPLOYEES)
Government shutdowns happen. In the last decade it’s happened more than once. If you are relying on Uncle Sam to pay your bills, make sure you are covered in the event this happens.
I have many friends who are in the Coast Guard and as of the last government shutdown were standing in line to get groceries for their families.
Right, wrong, or indifferent. You need to consider how to best protect yourself and your family.
MEDICAL OR DENTAL EMERGENCIES
The absolute last thing you want to have to worry about in an emergency is whether you can afford the emergency.
There are some times, places or instances where your insurance won’t cover. Plan ahead.
COST OF LIVING INCREASES
I live in one of the most expensive states in the US.
If you don’t know the pain of paying $7 for a gallon of milk– well count your blessings, because it’s the absolute worst.
Increases in rent, heating or air conditioning bills sky rocket due to seasonal weather changes, property taxes go way up, etc.
Consider the potential for these kinds of costs for where you are living.
MAJOR CAR REPAIRS
This is absolutely one of the most painful places to spend money. A car is a depreciable asset. Nothing sucks more than having to sink money into something that becomes less valuable every minute that you use it.
Unfortunately, for most people, it’s also a necessary expense as you need it to get to work, take your kids to school, etc.
Keeping up with your car maintenance is a great way to ensure it runs smoothly, but machines break.
MAJOR HOUSEHOLD REPAIRS
New air conditioner, new furnace, water heater rusted out, roof is leaking. There are tons of things that can break inside your home and unfortunately many of them are high dollar items.
You know what’s not a fun way to spend $1,200– on insulation.
This is peak adultness right here (insert eye roll).
A family member suddenly becomes gravely ill or worse there’s a death in the family.
Your best friend’s had a baby 2 months early and needs you.
Your baby sister decides it’s a good idea to elope with the dude she met at a bar last night for Karaoke and nickel beer. And you need to head out as soon as physically possible to sit on her until she sees reason, because we’re not here for it, Karen!
Whatever the circumstance– you want to be able to just pick up and go.
Pets are members of our family. Do you want to be in a position where you aren’t able to get them the life saving services that they need?
HOW TO PLAN FOR FINANCIAL EMERGENCIES
You may be thinking, it’s going to take me a year or years to get to that level of savings!! What do I do about them now?
Glad you asked!
As quickly as you are able, meaning laser focus and making hard cuts if you have to, aim to save enough money to cover at least month’s expenses so you have a starter Emergency fund.
Not a months salary, but enough money to cover a month’s expenses.
If you follow Dave Ramsay, you know he advises a $1000 to start if you are still paying off debt and then move onto fully funding later. (Check out more Dave Ramsey money tips, if you are interested.)
While I understand the why, no real emergencies I can think of would be satisfied at $1000, so it kind of defeats the purpose– at least for my family.
You’ll need to do your own soul searching on how much you think is appropriate, but for the majority of emergencies that can pop up (aside from job loss), I could handle with one month’s crisis budget.
Either way, you need to have something put aside for emergencies as soon as possible!
Once you have your minimum Emergency fund in place you can reevaluate your priorities and decide if you want to diversify where you are putting money or continue on until your Emergency fund is fully funded.
SHOULD I USE A CREDIT CARD TO COVER EMERGENCIES?
Well, yes, you could use a credit card. However, chances are if you didn’t have the cash to cover the emergency, chances are you aren’t going to have the cash to pay the balance back on your credit card when it comes due.
Which means– interest. So not only are you paying out of pocket, you are then paying a little (or a ton depending on the repayment period) for this emergency.
I don’t know about you, but I hate throwing money out the window, which to me, is what interest payments are all about.
It’s no fee, requires $0 balance and has 1% APY (at the time of posting). Ally is another one I’ve used before. If you google high yield savings accounts, you can find some good options.
WHERE TO KEEP YOUR EMERGENCY FUND?
There are really two ways you can save up for your emergency fund: cash or a high yield emergency fund.
For some families, it may be easier to save the cash as it feels less tempting to spend. Similar logic to why cash budgeting is so effective with keeping your budget on track.
Capital one has these fantastic Capital One 360 saving accounts (not sponsored and not an affiliate link) that I use. I like them because I can set up multiple accounts for specific funds and can name them individually to help keep them organized.
Ally is another online bank that has great high yield saving accounts.
HOW TO SAVE FOR YOUR EMERGENCY FUND?
We covered why you need an emergency fund, but now let’s talk about how to save it.
I’ll be honest. I’m a very goal oriented person, but I also appreciate little wins. Little wins keep me motivated. So for me, I have little challenges for myself.
You know what this is?
It’s $1000 in $20 increments. I can talk myself out of a lot of little $20 purchases. Every time I do, I get to color in one of those little circles. I love coloring them in so much! It’s so very gratifying for me to be able to really see my progress.
I have a couple of other saving printables that I’ve included in my Budgeting Bundle which you can find in my resource library.
If you want to know more about my budgeting bundle, check out my post for Budgeting Beginners.
Automate Saving for your Emergency Fund.
Once you have any idea of how much you can commit to the Emergency Fund, pick a day (or a few) and have the money automatically taken out of your checking account.
The beauty of automating is you get to set it and forget it. You are not tempted to not contribute, you don’t miss the money that you never see.
Even if you can only spare $10 a month, something is definitely better than nothing. Just be consistent and keep with it and you will be successful.
You might be wondering what about if I don’t $1 let alone $20 dollars to save each month towards my emergency funds?
The next section is for you.
How to Start and Emergency Fund with No Money ($0)?
If you are the person who gets to the end of their month with pennies leftover, I hear you!
But the honest truth is you are the type of families who need these accounts the most.
So let’s talk about ways to find or make money to start supplementing your emergency fund.
Don’t worry, there is more in there than cut out Starbucks– I know you probably have already thought of that on your own!
I promise, there is something in there that can save you money.
If you have mastered being frugal and there isn’t one more cent to cut from your budget, let’s consider making a little money on the side.
Check out the list of articles I love all about killing it with side hustles.
- Amy from, Daily Successful Living: 48 Side Hustles That Will Help You Make Extra Money
- Carly from, Mommy on Purpose: Side Hustles that Will Make You Money Immediately
- Monica from, Lucky Mojito: Selling Our Way Out of Debt
- Francesa from, From Pennies to Pounds: Side Hustles that Will Make You Money Now
- B. from Boost My Budget: How to Make Money on Pinterest
- Sara from, Gathering Dreams: 15 Creative Ways to Make $100 Every Day
- Samantha from, Samantha Allaker: How to Earn Money as a Freelance Write from Day 1
What to Do Once You Have an Emergency Fund?
First, go ahead and take a minute to give yourself a mental high five because WOW!
So you have 3-6 months of salary put away. What should you do next? Should you keep putting money away for an even bigger buffer? Splurge?
You could do either of those, but perhaps considering your long term financial goals would be a better and more prudent use of your money.
- Do you have any debt hanging around that you could payoff?
- Interested in owning your own home?
- Need a new car?
- Retirement goals? Consider putting more money in your retirement accounts.
- Education goals or expenses for yourself or your family
If you haven’t started yet, I highly encourage you to start planning your Emergency Fund. Emergencies never happen when it’s convenient or when you expect it. So get started today!